Greece’s fate: In Angela Merkel’s hands?

Is Greece’s fate in the hands of Angela Merkel? One leading economist with close ties to Greek finance minister Yanis Varoufakis says that the primary obstacle to compromise is a dramatic division within the German government, with one faction demanding that Greece fully adhere to its previous commitments, and another powerful group advocating compromise.

“It’s all up to Merkel,” says James Galbraith, who spent seven days in mid-February at Varoufakis’ side in Brussels and Athens. “We’ve heard from her finance minister, who takes a negative stance, and from her vice chancellor, who wants to talk. The person we haven’t heard from is Merkel. We know she does not talk until needed. They are as tough as possible, then make one concession at the last minute so they don’t have to make two.”

Galbraith summarizes Merkel’s dilemma—and the best hope for an agreement—with one fundamental question: “Does Merkel want to be the person who presides over the fragmentation of the Eurozone?”

It’s hard to imagine a more unlikely duo than Galbraith and Varoufakis. The former is the Harvard, Yale and Cambridge-educated son of legendary economist John Kenneth Galbraith. Varoufakis is a firebrand who sports leather trench coats and electric blue shirts at meetings with Europe’s stuffy elites, and blasts off on motorcycles to unwind. Yet as colleagues at the University of Texas in Austin, they became not only great friends but intellectual soul mates, co-authoring (along with UK economist Stuart Holland) a 2013 treatise on resolving the Eurozone crisis that advocated for replacing large portions of troubled nations’ sovereign debt with super-safe ECB-backed bonds carrying low interest rates. It’s clear that Galbraith’s ideas helped shape Varoufakis’ controversial campaign to end “austerity” in Greece and protect government jobs and pensions.

Working alongside Varoufakis, Galbraith got an inside view of the chaotic maneuvering at a Eurogroup meeting of European finance ministers, held on February 16 in Brussels. “I stayed with the tech teams, from the 11th to the 17th, including the Brussels meeting,” says Galbraith. “I was in the boiler room with the Greek guys, the working stiffs.”

At the Eurogroup conclave, Pierre Moscovici, the EU commissioner for economic and financial affairs, presented Varoufakis with a draft communiqué that allowed Greece to apply for an extension of its loan agreement while granting time to discuss a new growth program for Greece. As Varoufakis stated at the press conference after the meeting, he was poised to sign the Moscovici communiqué, which he praised as a “splendid document” and a “genuine breakthrough.”

But the chief of the Eurogroup, Jeroen Dijsselbloem, was working on his own document. “Yanis said, ‘I have a text,’ and Dijesselbloem said, ‘No, this is the text.’”

Galbraith and the Greek team then attempted to combine portions of the two drafts into a document acceptable to both sides. “My day from that point, along with some other people, was taken up with trying to turn either of those texts into something that could be signed. In another half hour, we could have done it.”

Then, according to Galbraith, German finance minister Wolfgang Schaeuble closed the meeting. “He was saying ‘no’” to fashioning a joint statement as a prelude to a compromise, says Galbraith.

For Galbraith, the lack of coordination on the European side was shocking. “I’m an old Congressional staffer,” he says. “To watch an official body function in this slipshod and ad hoc way, to watch the Eurogroup and the way things were done, was really a revelation.”

On February 18, Varoufakis presented a formal request for an extension of Greece’s loan agreement with the Eurogroup. Once again, the divergent responses left Galbraith confounded.

“Jean-Claude Juncker [president of the European Commission] said it was a good start,” says Galbraith. He also notes that Germany’s vice chancellor, Sigmar Gabriel, said that the loan extension letter was a “starting point” for negotiations. But Schaeuble contradicted Gabriel, dismissing the request as “not a substantial position.”

“My eyes are bugging out watching this,” says Galbraith. “This is Germany, the most powerful government in Europe!”

For Galbraith, the divisions in Germany, and among the nations themselves, have made it clear that the European leadership are poor negotiators. “They made the mistake of exposing to Yanis that they are playing a very hard game, but not playing it very well, from the point of view of basic political skills.” He dismisses the idea that the Greek position is confusing. “I think the Europeans want to pretend to be confused, but the confusion exists in their minds, not in the Greek position.”

For Varoufakis and Galbraith, petty politics is trumping sound economics. “The institutional players—the IMF, European Community, and ECB—have been constructive,” says Galbraith. “But the creditors, the active players, are the finance ministers, and they are divided and hostile.”

The camp strongly opposed to compromise includes Spain, Portugal, and Finland. “Their leaders all facing elections with rising opposition,” Galbraith says. “They’re terrified that their opponents will take heart from the Greek position.” Hence, surviving in office means more than saving the Eurozone.

Breaking the impasse will most likely require the intervention of the only leader powerful enough to pull off such a maneuver: Angela Merkel.

Through all the turmoil, Galbraith’s admiration for his friend Varoufakis has only increased. While many argue that Varoufakis’ unorthodox wardrobe and provocative statements—remarking that the reform agreement amounts to “financial waterboarding,” for example—are antagonizing Europe’s financial establishment, Galbraith says that fellow ministers should welcome him as a rare truth-teller. “His honesty, clarity, and erudition are quite unknown in European circles, so I’m sure it’s quite a shock to experience him for the first time,” he says.

As an example of Varoufakis’ unvarnished honesty, he cites his friend’s statement that among those with whom he’s negotiated, Schaeuble, a staunch opponent, is “the only one whom I have found to have intellectual substance.”

After the depressing experiences in Brussels, Galbraith found the mood in Athens exhilarating. “Just three to six months ago, it was totally depressing. Now there’s a complete change of mood; the sense of pride is restored,” he says.

No one symbolizes that new optimism better than Varoufakis. “We walked together from the ministry to the Parliament nearby, and it’s an experience,” marvels Galbraith. “People in cars roll down their windows to shake his hand, bus drivers stop to salute him, he’s surrounded by kids in the streets.” Varoufakis even stopped for five minutes to reassure a cleaning lady looking for work, his hand on her elbow. “He’s as much of a star as Alexis Tsipras [Greece’s new prime minister],” says Galbraith.

Will Varoufakis fold to keep Greece in the Euro by dropping the growth platform that got the new government elected in the first place? “That’s impossible,” says Galbraith. “He’d get on his motorcycle and drive off. He gnashed his teeth to take the job. He wanted to put his ideas into practice.”

Europe’s finance ministers have never witnessed anything like Varoufakis. Merkel will need to decide if compromising with someone regarded as this radical and outrageous is really an option. The Euro’s future may hang in the balance.

Why Europe has bigger problems than the Euro

Is Europe headed for disaster? The answer is both yes and no. For the past six years, the debt-troubled continent has been in the headlines. Its economy is stagnant; deflation has set in; and the illusory dream of a durable monetary union seems to be slipping away as many in some countries remain jobless.

As the European Central Bank decide whether to launch a controversial stimulus program this week, I do not believe that Europe will collapse anytime soon. It has the resources to overcome its present crisis. The continent has relatively strong institutions, an educated population, modern infrastructure, and scores of competitive companies. While policies to reduce government spending and deficits may cause extreme and often unnecessary pain in the short run, European economies will eventually grow again after the deleveraging takes place.

Learn more about shifting global economies from Fortune’s video team:

However, by the time the economy is ready to recover, other problems will strike Europe. Prominent among them is the graying of the population. In about 15 or 20 years, Europe will have more grandparents than grandchildren. This situation will be hard to deal with because retirees not only collect pensions and require healthcare, but they also consume less, especially durable goods. Thus, if this happens, the economy could be burdened by slower consumption and higher taxes to pay for social benefits.

After years of government cutbacks and corporate restructuring, Europe’s strengths in the area of science and technology will be severely diminished, as more than half of R&D investments comes from the government in most European countries. This second problem will make it harder for Europe to keep pace with not just the United States but also the emerging Asian giants, which are investing increasing amounts on research and development.

The third problem will be of a political nature. Europe is increasingly divided along East-West and North-South lines. Distrust and resentment is building up, as problems go unresolved and social tensions mount. As a result, both left-wing and right-wing extremist parties are gathering increasing proportions of the popular vote. These political forces are not only populist in orientation but also anti-Europeanist.

One of the key drivers of political discontent across Europe has to do with trends perceived as external threats, including immigration and energy dependency. Western Europe successfully incorporated millions of guest and other foreign workers during the 1960s and early 1970s at a time when the economy was growing exceptionally fast. Nowadays, many people have a largely misplaced sense of competition with immigrants over jobs. Economic insecurity is also compounded by physical vulnerability, especially in the wake of terrorist attacks, such as those in Paris. The combination of economic and physical insecurity is an explosive mix, one that may well tilt upcoming elections in a dangerous direction.

The problem of energy dependency has been largely created by the policies pursued by several countries, which have tended to make them dependent on one or a few sources of supply while neglecting alternative options that might give them more freedom of action. Germany’s decisions to rely on Russia for gas and to phase out all of its nuclear power stations are two cases in point.

Taken together, these problems will be hard to manage simultaneously. Western Europe enjoyed three centuries of global hegemony, which came to an end with World War II. Under the umbrella of American benevolence, the continent grew rapidly in the postwar period. Today, it is a small peninsula increasingly at the mercy of demographic, political, and economic forces beyond its control, including those coming from North Africa, the Middle East, and Russia.

While Europe can no longer aspire to be a global power, it can certainly focus its attention on being a positive force in the world and on delivering a high standard of living for its population. Overcoming the present crisis in no way guarantees a bright future for Europeans. The foundations for prosperity over the long run must be laid today by investing in its people, updating its regulatory and governance structures, and, yes, coming to terms with the need to rejuvenate its population by attracting and nurturing immigrants. Without those, Europe will enter one final phase of decline.

Mauro F. Guillén is director of the Lauder Institute at The Wharton School of the University of Pennsylvania.

In April, she joined up with Arcadi Oliveres, an economist who promotes degrowth, a philosophy that advocates cutting production and consumption, to launch a political movement called Procés Constituent in Spain’s Catalonian region. Not a political party itself — it’s more of a lobby that aims to unify the left and the disaffected in Catalonia — this group’s manifesto calls for the nationalization of banks and energy companies and an independent Catalonian state outside of NATO.

“What Teresa Forcades and I laid out is the belief that the economic, social, and political situation in Catalonia, Spain, and Europe was truly a disaster, and it was necessary to change things,” Oliveres told me. “Unfortunately, we realized that the so-called conventional parties had almost no desire to change.”

Over the next six months, more than 40,000 signed up as Procés Constituent “adherents.” Forcades publicly dreamed about enlisting 100,000 people by year-end (it will likely fall short; Fortune made multiple interview requests to Forcades, but she is teaching in Germany and was not available for comment). And the group brought out thousands of members to protest the banking system during Catalonia’s annual Diada national celebrations.

It’s easy to exaggerate Procés Constituent’s importance, but the disaffection it represents is undeniable. As in other countries battered by the eurozone crisis, Spanish citizens were angered by the austerity measures demanded in exchange for bailout money by the “Troika” of the EU, the European Central Bank, and the IMF. Wages dropped, unemployment soared, and the welfare state frayed as the government cut social programs, education spending, and labor rights.

Worse, Spain’s dominant political parties — the right-leaning PP (Popular Party) and the center-left PSOE (Spanish Socialist Workers Party) — both seemed to believe that accepting austerity in exchange for bailout money was the only way to go.

“All the political parties are about austerity and cuts,” says Ignacio Lago, an associate professor of political science at Barcelona’s Pompeu Fabra University.

With neither party listening to their concerns, many Spaniards began to abstain from the political process or vote for small parties. In the 2011 elections, the PP won 186 of the 350 seats in Congress (the PSOE has 110), but a recent study from the newspaper El País found that if elections were held now, neither of the major parties would win close to a majority, and small parties would increase their share from 54 to 73 seats.

“That is a logical result of the fact that in the eyes of the public, both of the major political parties are tainted by responsibility for the current state of affairs,” says Robert Fishman, a sociology professor at the University of Notre Dame who has studied the euro crisis. “Exactly the same thing has happened in Greece and Italy.”

In the case of Procés Constituent in Catalonia, the main parties’ deafness has united disaffected middle-class voters with political leftists and those who, for reasons of identity and history, long for an independent Catalan state.

“The support of the Procés Constituent is really indicative of amorphous or generalized support for a whole family of movements that reject the status quo,” Fishman says.

The downturn has added an economic rationale to the dream of independence — Catalonia wouldn’t have to send its taxes to the central government in Madrid — and in opinion polls a slim majority of Catalans now want to break free. The increasing power of pro-independence forces in Catalonia has pushed the centrist regional government to push for a referendum on independence, something Spain’s national government calls illegal.

In theory, Catalan independence could cause a domino effect in which other regions of Spain — and regions in other EU countries — push for separation, leading the EU to collapse. But there’s a practical problem with that dream, says Ignacio Lago: For many Catalonians, support for independence assumes that a Catalonian state would be part of the EU, but the EU has said that breakaway regions would lose membership.

“I think there’s an absolute consensus, among all participants, that outside the European Union the independence of Catalonia is an economic ruin,” he says.

Still, no matter how unlikely the dreams being sold by groups like Procés Constituent may be, the leaders of Spain’s political center will continue to lose support to them until they can offer something more plausible of their own.

Bridge building and infrastructure in the Age of Austerity

Public opinion has soured on infrastructure projects. Slashed budgets and The Bridge to Nowhere certainly haven’t helped, but Ted Zoli’s projects represent a consistent bright spot in an otherwise muddied profession. The 2012 Engineering News-Record Award of Excellence winner talked to Fortune about designing bridges in the age of government austerity.

You’re bridges are very economical, especially considering public works today have a habit of spiral out of control cost wise. How do you accomplish this with your works?
If we think about structural systems these days in the developed west, one thing that is very clear is designing a difficult to build bridge with the least materials is not a great strategy for cost effectiveness. There are more labor costs associated with the final construction cost of a bridge now than in any time in the past, and certainly that trend will continue.

So to me, it’s being quite careful about how bridges are built and integrating the construction strategy into the design. That helps to keep projects on budget or maybe to build projects for much less.

I’m also very interested in making structural systems safer. One thing that you may find surprising but is certainly the case is that material efficiency or when you’re minimizing materials, does not necessarily make the safest structural system. I’m interested in those opportunities where a structure is easier to fabricate, construct, and is safer, yet is less expensive because you’re being very careful about the costs associated with its construction.

Do you think that the failure of others has led to a lack of confidence in architects and engineers for public works? If that lack of confidence does exist, how do we fix that?
I’m going to maybe argue slightly with the idea that it’s maybe not a lack of confidence. What I think what we’ve tended to do as a culture is we’ve looked at public works projects like infrastructure, like bridges, as the last bit of public architecture that we have.

We’re not building libraries and state buildings anymore, so the space in which we think about building iconic structures is often tied to public infrastructure. Iconic structures in many circumstances can be something that has loftier expectations and budget than something more austere, more functional as bridges have been traditionally.

For me, I’m very interested in the space where the right structural system, the right form, and the right construction method can still be iconic. It can still scratch that itch that we have I think in the need for public works projects to be a great representation of a community effort to make something better. I think often times bridges are that. It really takes a commitment on the part of a large community —sometimes cities, states, the federal government and the resources agencies. These are projects that involve many, many indeed contributions from many, many sources. It’s natural to see this as a coming together and to want to achieve something important, especially for something that is a major crossing.

The downside is that in many circumstances we have built infrastructure that doesn’t respect in a way the simple logic that it’s taxpayer’s money and we have very little of it — these days particularly. To me, it means a certain sort of austerity is necessary. Particularly in these times since 2008, it comes into focus how we have many needs and very little funds.

To some degree, over budget public works projects were tolerable when tax revenues were up. When tax revenues are down and we are really struggling to stimulate the economy and produce jobs, austerity in our design and some care that we are right sizing projects and being responsive to budgetary concerns is the call of this day.

I think we need to be an industry very creative about delivering a lot for a little.

How do you provide a lot for a little, especially considering the lack of funds at all levels of government for these public works projects?
There’s a couple of different strategies, but I would say trying to understand what goes into the cost of a bridge and how can there be innovation on the fabrication process, on the erection and even the transportation of the pieces of a bridge to the site. How all those things go together is a wonderful opportunity for a designer to look at the whole cost of a public works project, try to innovate in that space, and step outside of purely the traditional role of the engineer, which is to make sure the stresses work and the structural system has adequate safety. It’s instead to take a broader look at what costs money in public works projects and see if there are not ways that the designer can innovate to get at some cost savings.

Certainly some of my work has been successful with that. Some of my work I would say is an experiment and experiments are something that you learn from. I certainly have made some mistakes that I have learned from and lead me to believe that are benefits to these strategies and some cautionary tales. It’s not a perfect environment but there’s a richness in understanding the way a bridge gets built that gives you an opportunity to change your design. It influences the way your think about design tremendously and I try to lead with that in many circumstances.

I’m very curious about how big a piece I can ship? What kind of crane do I need to pick it up? At the fabricator shop, what technique will he use whether it’s pre-cast concrete or structural steel? What techniques are cost-effective and what are not? There are a lot of opportunities for engineers to broaden their perspective about what it is they’re designing and to get into looking at these other aspect of what makes a bridge cost so much.

Do you think the future of bridge building is trending toward your type of work — the economic yet aesthetically pleasing variety?
Ha-ha! I’m not so sure but it certainly has given me many opportunities to design bridges with that model and hope to have more in the future.

I would say there are many different types of projects with many different types of aspirations and maybe it’s fair to say that the designer gets mapped to the right sort of opportunity.

I hope to remind people both in my industry and the public that when a bridge gets built it’s with their money and they own the bridge. It’s really there’s. So given that it seems no one likes to pay their taxes and almost no one sees the connection between their taxes and a better life, bridges in my view are a way to reconnect that sort of trust.

Now this is sort of farfetched hope, but when people pay their taxes and they have world-class infrastructure – they have a great commute, bridge, or efficient mass transit – that they think to themselves, “My tax dollars went to something valuable.” If we can connect that value, some tax dollars to great infrastructure, we would do our industry a great service and also help everyone recognize how invaluable and what the right role of government is to making our lives better.